Guidelines for Taxation of International Air Transport Profits Foreword
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GUIDELINES FOR TAXATION OF INTERNATIONAL AIR TRANSPORT PROFITS FOREWORD The following position paper has been prepared by the International Air Transport Association (IATA) in order to explain the problems faced by international airlines in relation to taxation on in- come imposed by States in which they operate other than their own fiscal domicile. The International Civil Aviation Organization (ICAO), which is a specialized agency of the United Nations and the international government organisation concerned with aviation, has adopted a consolidated Resolution regarding taxation of international air transport. The primary principle of ICAO policies on taxation is that there should be reciprocal exemption for taxation on earnings of international air transport by States in respect to international airlines, yet some ICAO Contracting States have not adopted this principle. Where a State has not adopted the principle of reciprocal exemption on taxation of earnings, as recommended by ICAO, IATA believes that taxation of international airlines by a State should be on a net income basis; that is, on income earned within the State including the appropriate deduction of all expenses incurred in respect of the services provided in relation to that State, irrespective of where the expense was incurred. These principles are consistent with the ICAO Resolution. The information contained herein is intended to assist various Government departments and international organisations in un- derstanding the airlines’ foreign taxation problems and to provide a rational basis for discussion between Government authori- ties and international airlines. 1. INTRODUCTION 2. BACKGROUND 1.1. IATA is an association of world air transport enterprises 2.1. In contrast to IATA, ICAO is an intergovernmental operating scheduled air services under flags of countries organisation and the specialised agency of the United Nations eligible for membership in the International Civil Aviation concerned with international civil aviation. The Convention on Organization (ICAO). The stated purposes of IATA include International Civil Aviation of 1944 (Chicago Convention) sets the promotion of safe, regular and economical air transport out the charter of ICAO. The aims and objectives of ICAO for the benefit of the peoples of the world, the fostering of are to develop the principles and techniques of international air commerce, and the study of related problems. IATA’s air navigation and to foster the planning and development of Charter also commits it to cooperate with other international international air transport so as to: organisations, including ICAO and the United Nations. The a) Ensure the safe and orderly growth of international membership of IATA, as shown in Appendix 1, represents civil aviation throughout the world; some 130 countries. b) Encourage the arts of aircraft design and operation 1.2. IATA is concerned with the approach of certain States for peaceful purposes; to taxation of income of international airlines serving these States. There also appear to be certain misconceptions c) Encourage the development of airways, airports, and regarding tax treaties as they affect airline operations, and air navigation facilities for international civil aviation; experience indicates that many tax administrations are not d) Meet the needs of the peoples of the world for safe, aware of how income is derived in foreign countries by regular, efficient and economical air transport; international airlines. This paper attempts to explain the underlying position of IATA Member airlines and to elucidate e) Prevent economic waste caused by unreasonable some of the problems faced by the industry, together with competition; background material of which tax administrations generally f) Ensure that the rights of contracting States are fully might be unaware. In addition, material is presented under respected and that every contracting State has a fair section 8 on the benefits of international air transport to the opportunity to operate international airlines; economies of States which perhaps have not to date been fully appreciated. g) Avoid discrimination between contracting States; h) Promote safety of flight in international air navigation; 1.3. From the outset it should be made clear that IATA and its members do not object to the payment of non-discriminatory, i) Promote generally the development of all aspects justly and equitably levied income taxes. They do however of international civil aeronautics. object most strenuously to taxes imposed, contrary to ICAO recommended practice, on gross receipts or turnover and to income taxes imposed on bases which do not take into 2.2. The Chicago Convention therefore recognised from account the profitability of the airline operations in that the beginning the need for improving the facilitation of State. The industry respects fully the right of autonomous international air transport by removing obstacles to free and States to impose taxes, but the nature of international airline unimpeded passage of aircraft, passengers, crews, baggage, operations which form the network of global air commerce cargo and mail across international boundaries. gives it a unique place in the economy of the States concerned. 2.3. The purpose of such facilitation is twofold. First to enable air commerce to take full advantage of the pre-eminent speed of the airplane as a medium of transportation and to prevent its’ being hampered by excessive delays for documentation and other border-crossing requirements. Secondly, to avoid the imposition by individual countries of onerous burdens on international airlines in the form of taxation, insurance requirements, user charges, and the like, so that the benefits of air transport could be extended to all States served as economically as possible. 2.4. Neither the Chicago Convention nor bilateral air services agreements negotiated between States release international airlines from compliance with all of the normal legal and commercial obligations of a foreign enterprise in that State, e.g. company qualifications, registrations and taxes. 02 TAXATION OF INTERNATIONAL AIR TRANSPORT NET INCOME BASIS 2.5. The problems of operating in a foreign country are Doc 8632 also calls on Contracting States to notify numerous. They include the provision of adequate fuel ICAO of their practice and attitude to the Resolution. supplies, the availability of on-board meals for departing A supplement to this document, which includes the current passengers, the availability of hotel accommodation in case responses of Contracting States regarding their position of aircraft delay, the remittance of proceeds of ticket sales with respect to the Council’s resolutions, can be found in free of exchange restrictions and the employment of qualified Appendix 4. experts to service the aircraft and to administer the ground facilities. 3.2. In addition, the ICAO Assembly adopted in 2001 Resolution A33-19 which among other things refines ICAO’s 2.6. The impression that international airlines do substantial distinction between a tax and a charge and urges Contracting business within States they serve is often misleading and States to follow the resolution of the Council as contained inaccurate as the business they conduct in foreign States in Doc 8632. This Resolution was since reaffirmed under is incidental and ancillary to their primary international Assembly Resolution as shown function. International airlines operate in the long term at in Appendix 5. lower margins of profit than most other businesses and differ materially from foreign business enterprises which engage in 3.3. In spite of the recommendations of ICAO, some manufacturing, merchandising, natural resources extraction States still do not provide for the reciprocal exemption of or other activities involving substantial internal presence in profits derived from the operation of foreign aircraft either the States where they are located and operate. pursuant to statutory provisions in the tax laws of the two States or by negotiation of tax treaties. Airlines from such 2.7. Taxation on a basis other than net income leading to States subsequently may be subject to income tax in other potential double taxation is one which causes significant States when they come within the jurisdictional reach of concern to the airline industry. those tax administrations. 3.4. In accordance with the ICAO Resolution, IATA’s position is that the most reasonable and equitable means of dealing with income taxation in foreign States is on the basis of 3. INCOME TAX EXEMPTION reciprocal exemption either by operation of income tax law, or by treaty. 3.1. ICAO has a longstanding policy and guidance material for States on the taxation of certain aspects of 3.5. Negotiation of full taxation treaties involves international air transport, namely: the taxation of aviation consideration of many factors and requires the ratification fuel, lubricants and other consumable technical supplies; by the governments of both countries. However, in many airline income and aircraft and the sale and use of States the income tax legislation makes provision for the international air transport, such as on tickets, passengers exemption of profits from the operation of aircraft of a foreign country where that foreign State allows a reciprocal and airline gross receipts. The ICAO Council has undertaken exemption. In these circumstances, the responsible Minister or a number of revisions to the policies on taxation and in the Commissioner